Those in the business of fast‑moving consumer goods (“FMCGs”) are likely aware of the plethora of environmental and product stewardship regulations applicable to the FMCG sector.  These laws are set to increase and expand in application.  What FMCG companies also need to get to grips with are a range of broader (and also fast‑moving!) environmental, social and governance (“ESG”) developments and consequent risks and opportunities.  Companies need to understand how the new world of ESG impacts their supply chains, key ingredients and components, consumer choice and confidence, competitive advantage, market accessibility, and marketing. 

Designed as a ‘primer’ for FMCG companies, in this piece, we cover a range of key trends in the emerging UK and EU ESG legal landscape as relevant for the FMCG sector, from farmers to Food Business Operators (“FBOs”) and from manufacturers to retailers.  We also discuss some key legal and reputational risks; as well as pointers to help companies decipher and prepare for the ESG storm.

We focus on the UK and the EU (first movers on many ESG issues), but the landscape in other jurisdictions (including, for example, the US) is also evolving and becoming more complex.

Key ESG Issues for FMCGs

We think there are four categories of key ESG developments for FMCGs to watch: (I) corporate reporting and disclosure regimes; (II) green/sustainability claims and labelling; (III) supply chain obligations; and (IV) product packaging and presentation.

Many emerging ESG frameworks cut across sectors.  This may be efficient for regulators, but can make identifying sector-specific risks and opportunities more challenging.  We have sought to do that below.

I.   Corporate Reporting and Disclosures

The EU and UK have ambitious plans to redirect companies — and the flow of capital — towards more sustainable activities.  The plans require companies to review and publically report on their impact on the environment and social factors, including human rights.

• EU CSRD:  The Corporate Sustainability Reporting Directive (“CSRD”) will require thousands of companies and groups incorporated in the EU that qualify as “large” (as well as certain non-EU parent undertakings of such companies and groups)[1] to report on their ESG impacts.  These will include their impacts on climate change, pollution, water, biodiversity, and resource use and the circular economy, as well as their impacts on their own workforce and workers in the value chain, their consumers/end-users, and the communities in which they operate.  The CSRD has entered into force and will start to apply to the first tranche of very large companies for financial years starting in 2024, with audited and published sustainability reports due in 2025.  

The broad application and detailed reporting requirements of the CSRD, and the risks associated with audited public disclosures, generates risks and opportunities for many companies.  See here for more information on the CSRD.

• UK Green Finance Strategy:  The UK Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 entered into force in April 2022.  Like the CSRD, these UK Regulations require large companies to make detailed public disclosures about targets and performance, but are limited to climate-related issues (as opposed to broad ESG).  The reporting requirements apply to accounting periods starting on or after 6 April 2022.  
• UK Modern Slavery Act:  In 2015, the UK introduced a requirement for companies to report on steps taken to eliminate modern slavery from their global supply chains.  Following independent findings that the Modern Slavery Act’s enforcement provisions are not effective, and that many companies are not fulfilling their obligations to report, the UK government committed in 2020 to strengthen the provisions (see here and here).  To date, the government has not introduced any new legislative measures, or published more specific details.  However, it is possible that we will see movement on this in the coming year or two, particularly given the increased focus on forced labour in the EU. 

II.  Green/Sustainability Claims and Labelling

“Greenwashing” – i.e., the act of presenting a product or practice in a way that suggests it is more “eco-friendly” or green than it is in reality – is under intense scrutiny.  When it comes to food in particular, lawmakers and regulators are taking additional action to ensure that consumers can clearly understand the sustainability of their food choices.

• Green claims and greenwashing:  Greenwashing was one of the biggest ESG‑related issues in 2022.  The EU is now negotiating the text of two new Directives that will update and harmonise the approach to green claims across the bloc.  In March 2022, the European Commission published a Proposal for a Directive Empowering Consumers for the Green Transition (“Greenwashing Directive”).  This Directive prohibits the use of “generic” environmental claims (e.g., “eco-friendly”), a number of specific environmental and green claims, and unsubstantiated “sustainability labels” (including self-certification).  To smooth the EU’s transition to a ‘green economy’, the Greenwashing Directive also strengthens the EU’s consumer protection rules against traders making misleading claims about a product’s environmental or social impact; durability; or reparability.  One year later, in March 2023, the European Commission presented a Proposal for a Directive on Green Claims (“Green Claims Directive”).  The Green Claims Directive proposes a new framework, applicable to all companies operating in the EU/EEA, to harmonise the rules on the substantiation of voluntary green claims, imposing very strict methodological and presentation requirements.  For more information on the new Green Claims Directive, please see our dedicated blog posts, here and here.

Authorities in the UK are also focusing on greenwashing.  After launching an investigation into the fashion sector in 2022, the UK’s Competition and Markets Authority (“CMA”) is now focusing on an in‑depth investigation into greenwashing of “household essentials”, including food and drink, toiletries, cleaning products and other FMCGs.  Meanwhile, the UK’s advertising self‑regulatory body (the ASA) continues to increase the number of rulings it makes against household brands making sustainability claims.

• EU Food information regulation:  The EU’s Farm to Fork Strategy sets out a proposal for a “sustainability labelling framework”: mandatory labelling to give consumers a quick and easy way to gauge the sustainability of a food product.  The EU ran a public consultation on this initiative (along with others) in 2022, and we expect some clear proposals for new rules by the end of 2023. 

III.   Supply Chain Obligations

In 2022, we saw a number of legislative proposals that will force FMCGs to consider the environmental impact of the farming and production practices that they — or their suppliers — use.

• Corporate Sustainability Due Diligence Directive:  The EU’s upcoming Corporate Sustainability Due Diligence Directive (“CS3D”) will require companies that are based in, or do substantial business in the EU to conduct far‑reaching human rights and environmental due diligence on their operations and supply chain.  Building on existing, non-binding due diligence frameworks such as the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights (“UNGPs”), it is likely that due diligence obligations will require companies to implement policies and procedures, conduct risk assessments, establish grievance mechanisms, and respond to identified risks, including through remediation.  The exact scope of the due diligence obligations, including, for example, the definition of a company’s “value chain” subject to the due diligence obligations, is still under negotiation, but we expect the text to be finalized in late 2023.  In the meantime, a number of states in Europe have already introduced mandatory due diligence requirements.
• Deforestation risk commodities:  Both the EU and the UK are cracking down on commodities that are linked to deforestation.  For FMCGs, the most relevant commodities that will be covered by upcoming legislation are palm oil, coffee, soya, cocoa, rubber and cattle (as well as derivatives of those commodities, like chocolate and beef).  The legislation also covers timber, so printed paper products — like those used in packaging — will also be affected. 

In December 2022, the EU agreed a draft text for a Regulation on deforestation risk commodities.  On 19 April 2023, the European Parliament voted in favour of the Regulation, and the Council of the European Union is expected to provide its final approval shortly. Under the Regulation, companies will not be permitted to sell their products unless they verify and issue a “due diligence” statement, to the effect that products that they place on the EU market have not led to deforestation or forest degradation anywhere in the world as of January 1, 2021, and comply with local law in their country of origin (including e.g., environmental protection, human rights and labour laws — for more detail, see our recent article here).  Companies are expected to implement robust due diligence measures, including tracing relevant commodities to farm level (though these requirements would be different from those under the CS3D).  We expect the Regulation to enter into force in June 2023, and start applying to companies 18 months after.

The UK is taking a similar approach.  Under a requirement passed under the Environment Act 2021, companies will be prohibited from using certain forest risk commodities, or products derived from forest risk commodities, in the UK, unless the producer of the goods complied with local laws relevant to deforestation in product’s country of origin.  Companies will also be required to establish a due diligence system for forest‑risk commodities, and report annually on their activities.  We await secondary legislation that will clarify many of the details of the requirements, including the commodities in scope.

• Forced labour product ban: In September 2022, the EU proposed a Regulation banning products made with forced labour from the EU market.  The proposed Regulation is broad, covering all products on the EU market (i.e., products produced in the EU for domestic consumption and export from the EU, and products produced elsewhere and imported into the EU).  National authorities will have the power to investigate suspected cases of forced labour in supply chains; to require companies to dispose of goods made with forced labour; and to impose fines on companies.  EU customs authorities will have the power to stop goods made with forced labour at the EU borders. 

The EU proposal is broader than the equivalent US regime, insofar as the EU proposal applies to domestically‑produced goods as well as imports.  The US regime is, however, well‑established, and FMCG-related commodities that have been subject to import ban restrictions (so‑called “withhold release orders”) have included palm oil, tobacco, tomatoes, cotton and sugar, from regions as diverse as China, Mexico, the Dominican Republic, and Malawi.

• Ecocide:  There are national and international proposals to make “ecocide” — usually meaning a substantial likelihood of severe, widespread or long-term environmental damage — a crime.  In 2021, legal experts defined and pushed for ecocide to be a new fifth crime under the Rome Statute of the International Criminal Court.  This was supported at the time by a proposal for a formal amendment to the UK’s Environment Bill, although the proposal was subsequently withdrawn.  The EU is also considering an amendment to its 2008 Directive on Protection of the Environment through Criminal Laws, to include ecocide.  Critically, some of the proposed criminal measures could be applied to companies, and may also be used as a footing for civil litigation.  For example, Belgium has recently started the process of including ecocide as a crime in national law (see, e.g., here) and in its proposal, the Belgian parliament points to a number of examples of ecocide that involve specific companies.  The level of risk for companies can change, depending on national procedures for initiating criminal prosecutions.  For more information, please visit our posts on COP‑15 on Biodiversity and COP 27.
• Land-use change:  In 2022, the EU agreed updates to the existing Land Use, Land Use Change and Forestry (“LULUCF”) Regulation.  From 2026, each EU Member State must ensure that the amount of CO₂ equivalent that is sequestered by the soils, trees, plants, biomass and timber industries exceeds the amount that is released.  Member States can achieve their targets in various ways.  FBOs in particular should watch out for changes in policies around urban planning, infrastructure, and agriculture (especially restrictions on monocultures, and intensive practices).
• Water quality and micropollution:  In 2022, the EU proposed a revision of the existing Urban Wastewater Treatment Directive.  The proposal includes a number of measures to increase the effectiveness of urban wastewater treatment and to reduce pollution across Europe.  Crucially, the EU has identified cosmetics and pharmaceuticals as key sources of micropollutants in wastewater.  Under the “polluter pays” principle, cosmetics and pharmaceutical companies will be required to pay additional contributions towards wastewater treatment.  We expect the EU to make progress on the revised Directive in 2023.
• Agri-chemicals:  In 2022, the EU proposed a new Sustainable Use of Plant Protection Products Regulation.  The draft Regulation sets out to cut the use and risk of chemical pesticides by 50% by 2030 across the EU.  EU Member States can set their own national targets.  The proposal would replace the existing EU Sustainable Use of Pesticides Directive (2009/128), and make its rules directly binding in Member States.  We expect the EU to progress this new Regulation in 2023.

IV.   Product Packaging and Presentation

Businesses in the EU and UK are subject to increasingly onerous requirements when it comes to the use of plastics and other materials in the packaging and presentation of their products.  Various new bans and initiatives are planned and, in many cases, are already underway.

• Single-use plastic bans:  FMCGs are coming under increasing pressure to substitute single-use plastic items for reusable, recyclable or biodegradable alternatives.  The EU’s Single-Use Plastics Directive, introduced in July 2021, banned a number of single‑use plastic goods, including containers made from polystyrene, and all products made of oxo‑degradable plastic.  The EU has also introduced specific labelling requirements for in-scope disposable cups, wet wipes, menstrual products and tobacco filters, and the number of goods subject to labelling requirements is likely to grow.  Manufacturers should be aware that the definition of ‘plastic’ is not straightforward and has been a very controversial subject.  For more information on the EU’s requirements regarding single-use plastics, please see our blog post, here.

The UK is implementing similar measures, with separate regimes in England, Scotland and Wales.  The days of non-recyclable, non-reusable packaging appear limited, and businesses should plan accordingly.

• Extended Producer Responsibility (“EPR”) for Packaging:  There is a drive to shift the full costs of managing household waste to producers.  The EU proposed a new Packaging Regulation in November 2022.  The Packaging Regulation is designed to cut down on the use of unnecessary packaging in the EU, and to encourage the use of reusable alternatives.  As drafted, the Packaging Regulation will take effect from 2025, and will require all packaging on the EU market to be recyclable in an economically viable way by 2030.  To achieve this, a single recycling labelling system will be introduced throughout the EU, and all packaging must be made (to some extent) from recycled materials.  The less easily recyclable a product is, the more a manufacturer will have to pay in fees for its introduction into the market.  We expect progress on the new Regulation in 2023.

A similar scheme is already underway in the UK: since 1 January 2023, corporate groups and individual businesses (whether corporate subsidiaries or independent), with a combined/total annual turnover of £1 million or more that produce over 25 tonnes of packaging in a calendar year are obligated to collect data on their packaging.  The UK government will use this data to determine how much each company will have to pay to contribute to waste management — producers of more difficult‑to‑recycle packaging will have to pay more.  These developments follow on from the introduction of the UK’s Plastic Packaging Tax in 2022, which requires importers or manufacturers of certain quantities of plastic packaging to pay more tax.

• Deposit Returns Schemes (“DRSs”):  A DRS incentivises consumers to bring their used packaging (usually beverage packaging) back for recycling, by charging a refundable deposit on top of the price of the beverage.  Governments all over the EU and the UK are introducing DRSs, in an effort to meet ambitious recycling targets.

However, the introduction of market‑specific DRSs may lead to headaches for manufacturers and distributors.  Different DRSs are implementing different, and potentially incompatible producer obligations and labelling requirements, meaning that producers may need to create new, market specific labels and re-think their supply chains.

• Food Contact Materials:  Chemicals which have previously been in common use in the food industry are coming under increased scrutiny.  EFSA has published a new safety assessment and a literature review on the use of mineral oils and petroleum derivatives in food.  Meanwhile, in France, a series of local legislative measures introduced a prohibition on the use of mineral oils in packaging and printing inks intended for the public.  The prohibition came into effect on 1 January 2023. 

KEY TAKEAWAYS

What Are The Risks? 

• Enforcement (of any of the above):  Many of the pieces of legislation discussed above can be directly enforced by authorities across the EU and UK.  Different enforcement mechanisms and sanctions are available, from prohibiting the import or sale of goods, to administrative, civil and unlimited criminal penalties, and even imprisonment for individuals (including directors and officers).
• Litigation:  Environmental and human rights NGOs are increasingly using litigation in European jurisdictions to put pressure on companies.  Some of these claims have been successful either on the merits, and/or in providing some clarity about the instances in which courts might accept jurisdiction for claims related to transnational human rights and environmental harm.  In recent years, we have seen claims brought for various causes, including greenwashing or misrepresentation, negligence and company failures to conduct due diligence, unjust enrichment, and derivative actions.  According to a 2022 report published by the London School of Economics, the cumulative number of climate change‑related litigation cases has more than doubled since 2015.  Simultaneously, activists are bringing public law challenges against governments in respect of climate change targets and procurement decisions, which may impact government procurement and legal standards.
• Reputation:  Consumers (and regulators) are becoming increasingly aware of ESG issues, and sophisticated in their assessment of a company’s credentials.  We expect consumers will increasingly demand that brands take active steps to contribute positively to the environment and demonstrate that they respect human rights in their operations and value chains.  As outlined above, companies should be wary of vague or ill-prepared “sustainability” claims and positions.

What Should FMCG Companies Do?

Faced with these developments and risks, what should companies do?

• Take stock:  Companies should take stock of the rules and regulations listed above, as well as other ESG frameworks not included above.  While we have covered key trends, new regulations sit against a backdrop of longer-standing ESG-relation regulations (e.g., regarding decarbonisation) and there may be other sector-specific rules that apply.  As with inventory stock‑taking, it is important for FMCG companies to understand what their current obligations are, what regulatory changes are coming down the pike and whether they are positioned to be able to meet them. 
• Assess risk:  Given the emerging legal risks and legal due diligence and reporting obligations, in order to inform risk mitigation strategies, it is critical for companies to assess and identify the risks not only to the business, but also potential and actual human rights and environmental impacts in their global operations and value chains.  As we have covered, risk assessments may soon be mandatory (e.g., under the CSDDD), but this is already good practice under existing international standards such as the OECD Guidelines and UNGPs and — increasingly — a part of business‑as‑usual. 
• Review global compliance programmes:  With an understanding of what is currently required and what is likely to be required, now is a good time for companies to review their global ESG-related compliance initiatives to ensure the company can satisfy its obligations under applicable due diligence and reporting standards. 

Covington’s ESG team is Chambers ranked, and featured among the top five global firms in the inaugural ESG rankings featured in the Crisis & Risk Management Guide.  We advise clients across a range of ESG‑related issues, including ESG reporting and disclosures, ESG‑driven transactions, environmental marketing and ‘green claims’, business and human rights, corporate governance, public policy and regulatory law insight and advocacy, ESG litigation, institutional culture and DEI.  For assistance with any of these issues, or more information on any topic discussed in this article, please do not hesitate to reach out to us.

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[1] Companies and groups are “large” if they exceed at least two of the following three conditions: (i) €40 million in net turnover; (ii) €20 million in assets; (iii) 250 employees.  In addition, non-EU companies that have a large EU subsidiary or a branch and also have annual turnover above €150 million in the EU will also have to comply.